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What is Cash Collateral?
Cash collateral is liquid cash and cash equivalents designated as collateral for loans and debts of various sorts.
One frequently used example of cash collateral is cash used in short selling of securities in a brokerage account. While securities equal to significantly more than the required cash margin can be substituted for cash, the most cost-effective and least risky way to maintain margin requirements is with cash and cash equivalents.
If you aren’t familiar with short-selling, it is basically when a broker loans you shares to sell, and you have to go out and find shares to replace the loaned shares. You are hoping that when you buy them, they cost less than when the broker allowed you to sell them, and while the loan is outstanding a certain amount of “margin” must be kept in the account as collateral for the loaned shares.
Some cash collateral loans will be made, sometimes just for the purpose of helping a banking customer build up their credit score, where the amount of “credit” a customer can use is limited to the amount of cash in the cash collateral account.
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